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December 28, 2011

Pozen Slams Gingrich on Social Security, Income Taxes

Former MFS Investments Chair takes issue with candidate’s ‘fix’

Bob Pozen is a senior lecturer at Harvard Business School and chairman emeritus of MFS Investment Management.

AdvisorOne contributor Robert Pozen took to the pages of The Washington Post on Monday to critique Newt Gingrich’s plan for both Social Security and income taxes. Not surprisingly, the long-time Democrat, who once considered challenging Elizabeth Warren in an upcoming primary for the Massachusetts Senate seat, isn’t impressed.

The senior lecturer at Harvard Business School and chairman emeritus of MFS Investment Management writes that Gingrich’s “fix” for Social Security builds on a Bush-era proposal, in which younger workers would contribute a portion of their payroll taxes to a private account instead of to the Social Security fund.

“But Gingrich takes a radical step further by effectively telling those workers not to worry if their investments of payroll taxes do poorly,” according to Pozen, who is also a senior fellow at the Brookings Institution. “According to Gingrich, ‘The Treasury will send them a check to make up the difference’ between their fund returns and their scheduled benefits under Social Security.

“By guaranteeing the government’s scheduled benefits as the floor, Gingrich gives workers a tremendous incentive to roll the dice. After all, if their investments do well, the workers will receive higher retirement payments. If their investments crater, the workers still get the guaranteed benefits from the Treasury. Heads you win, tails (we) taxpayers lose. “

Pozen notes that Gingrich argues that holders of private retirement accounts could not assume much risk because they would be allowed to invest in only a few diversified funds, such as those offered by the 401(k)-type plan for federal employees.

“Gingrich is right that this plan would prevent workers from buying stocks in individual companies such as Google or from investing in the latest social-networking initial public offering. Under that civil service plan, however, individuals can invest in international stock funds or small company stock funds — diversified funds with considerable downside risk.”

Moreover, he says, Gingrich’s plan explicitly allows workers to quickly switch between funds. Such switching would increase the risks associated with market timing.

Pozen is even more direct with Gingrich’s plans for income taxes, claiming it “perverts” the basic principles of a flat tax.

“Simply put, Gingrich’s proposal is not a flat tax,” he writes. “It dramatically reduces the tax rate for the top half of the income brackets without eliminating the significant economic distortions caused by tax deductions and credits. ... As a result, the Gingrich not-so-flat tax plan would reduce federal tax revenue by at least $850 billion per year, according to an estimate from the Tax Policy Center published last week.

These “extreme proposals,” Pozen concludes, “should raise serious questions for all voters about Gingrich’s financial stewardship if elected president.”